Amended Ontario Estate Tax

Republished with permission from the Canadian Tax Foundation. First published in the March, 2013 edition of theCanadian Tax Highlights, a Canadian Tax Foundation publication.

Ontario’s estate administration tax, better known as the probate tax, was created in 1998 under the Estate Administration Tax Act (EATA). The latest EATA amendments (Bill 173) became effective after 2012 and appear to create new issues for taxpayers. Ontario taxpayers reacted vigorously when the province trebled what was then known as the probate fee from 0.5 to 1.5 percent on estate assets whose value exceeded $50,000. The probate rate increase arguably triggered planning efforts to ensure that assets were not subject to the fee. Moreover, the probate fee itself was directly and successfully challenged in Eurig Estate (Re) ([1998] 2 SCR 565), in which the SCC held that although the probate fee was a constitutionally authorized direct tax, it had come into force through the lieutenant governor in council and had not originated in the legislature as mandated by the Constitution Act, 1867. The SCC gave Ontario six months to rectify the legislation in recognition of the financial hardship for the province if it could not retain the fees that it had collected over the years. Ontario responded by implementing EATA: the probate fee became a legislatively imposed direct tax that retroactively ensured the legality of the already collected probate fees (but specifically exempted the Eurig estate).

The term “probate” is a universally accepted legal synonym for proof—authentication by a court order that the will on which third parties are being asked to rely is the last effective will, and a declaration that certain executors and trustees are in control. (In Ontario, the former grant of letters probate is now referred to as a certificate of appointment of estate trustee, either with or without a will.) However, a will’s essential validity does not depend on its probate, and an un-probated will may be recognized and accepted by third parties who hold assets of value that devolve under the will. For years, the probate system relied on valuations that were left to the discretion of executors and their advisers. For example, if the value of a modest old house was estimated to be $200,000 for probate purposes but the house was later sold for $50,000 over or under the estimate, only $750 in probate fees (at 0.5 percent) was at stake.

A formal valuation was frequently seen as a waste of estate resources, and the payment of additional corrected probate fees and requests for refunds of overpayment were routine and non-contentious. A sworn affidavit of value of realty and personalty supported the application for probate; that requirement was in keeping with the system’s self-reporting nature and relied on the integrity of the practitioners who advised (and deposed) the executors. What was to be included in and excluded from the valuation was not always legislatively clear. The practices of deducting an outstanding mortgage on real estate and excluding insurance payable to a named beneficiary arose from small-print wording in Ontario’s probate application form. Whether registered plans such as RRSPs and RRIFs with named beneficiaries were excluded by analogy to insurance was debatable, and many practitioners may have excluded them because they were subject to income tax.

The bulk of value in most ordinary estates still passes to beneficiaries without the payment of probate, whether via joint tenancy, a joint bank or investment account, designation of a beneficiary to insurance or a registered plan, or a gift inter vivos. More valuable estates employ more sophisticated will substitutes such as family trusts and alter ego and joint partner trusts. For some time, wealthy international families with multijurisdictional estates have structured multiple-situs wills based on statutory provisions that were intended to accommodate foreign executors. For example, if the representatives of a foreign estate come to Ontario seeking to administer assets located in the province (such as a cottage in Muskoka), they do not need to re-probate the entire foreign estate in Ontario; instead, they can seek a limited grant of probate whose authority is limited to the particular Ontario asset that they want to administer. The probate taxes payable are calculated on those limited assets. Since the 1990s, the “limited grant of probate” format has been used in Ontario to establish dual concurrent wills, although the dual-will strategy is largely unknown to legal practitioners outside the estates and tax areas.

The primary concurrent will recites that it applies to all assets except for those that are defined and covered by the secondary will. The primary will is submitted to the probate process, and probate is paid on the declared values of the primary estate. For example, shares of a private company may be the subject of a secondary will if the company is run by family members who are not concerned about court authentication of the deceased’s will. Ontario unsuccessfully challenged the dual-will splitting of an otherwise probatable estate in 1998 in Granovsky Estate v. Ontario (1998 CanLII 14913 (ONSC)) and abandoned its appeal of the decision. Greer J, a senior and respected estates judge, confirmed that there was no obligation to pay probate taxes and that a will can be valid with or without probate. Probate was paid in exchange for the benefits of the court authentication process.

However, if an asset can be administered without the authority of a probated will, the executors are not required to apply for probate or to pay probate tax. The planning for and drafting of two or more concurrent wills is complex, time-consuming, and expensive, and the so-called dual will is thus used only if the projected tax savings warrant its use—for example, if a valuable private corporation forms part of the estate. In an era of ongoing budget deficits, Ontario’s apparently continuing struggle with the collection of probate tax gave rise in its 2011 budget to EATA amendments in Bill 173, which became effective after 2012. The amendments in section 4.1 bring EATA’s enforcement under the jurisdiction of the minister of revenue, but they go beyond harmonization and centralization of monitoring and enforcement.

The section 4.1 amendments adopt the minister of revenue’s assessment powers under the Ontario Retail Sales Tax Act. The minister can assess or reassess the estate in the four years following the probate tax’s due date (section 4.5(1)). However, EATA does not contain a clearance certificate similar to that provided for in the Income Tax Act, and thus the minister can apparently assess and seek to collect additional probate tax from the beneficiaries after the estate assets have been distributed but within the four years after the probate tax fell due. Traditional wisdom says that an estate trustee is liable in a representative capacity only and not personally, but commentators have raised the possibility that the beneficiaries may have legal recourse against the estate trustee personally. (See, for example, Barry S. Corbin, “Estate Administration Tax—The Nightmare Begins,” www.oba.org/en/pdf/sec_news _tru_may11_a1_EAT.pdf.) Given the minister’s broad powers, there may be disagreement over an estate’s valuation for probate, especially if a private corporation is involved. Inspectors appointed under the minister have the same powers set out in sections 31(1) to (2.2) of the Retail Sales Tax Act to inspect books, records, and property at any premises where the estate’s goods, books, and records are kept (section 4.7).

Because the assessment period is four years, it is unclear how this provision will be enforced after the assets are distributed. Clearly, the trustee must keep meticulous records—a requirement also essential for a trustee’s EATA due diligence defence—but a trustee will be reluctant to distribute all estate assets before the four-year assessment period expires. Holdbacks may not be sufficient to cover the unpaid tax in the case of undervaluation. A new EATA provision (section 5.1(3)) allows for the exchange of information with provincial and federal government entities. Any trustee who provides a false or misleading statement may be subject to imprisonment or a fine, but may rely on the due diligence defence if “the statement or omission was false or misleading and in the exercise of reasonable diligence [the trustee] could not have known that the statement or omission was false or misleading.” The practical compliance burden created by a new duty to provide information has raised concern in the tax community. EATA section 4.1(2) provides that “[i]f an estate representative makes an application for an estate certificate, the estate representative shall give the Minister of Revenue such information about the deceased person as may be prescribed by the Minister of Finance.” No regulations have yet been released. It is hoped that the ministry will consult with practitioners before implementation in order to avoid imposing an increased burden on the probate court system and greater delays in the issuance of certificates of appointment of estate trustee. In our view, additional information obtained under section 4.1(2) should not invalidate the dual-wills strategy, which has not been specifically addressed under EATA.

The estate administration tax is levied on the “value of the estate” (a reference is made to the definition of “value of an estate” in section 32 of the Estates Act). Section 32 has not been changed since it was considered in Granovsky, and section 32(3) clearly provides for a limited grant of probate: “Where the application or grant is limited to part only of the property of the deceased, it is sufficient to set forth in the statement of value only the property and value thereof intended to be affected by such application or grant.” In contrast, some other high-probate provinces’ legislation is directed at the dual-wills structure and other strategies. For example, section 86(2) of the Nova Scotia Probate Act expressly provides that the probate tax is imposed “on all assets of the deceased person that pass by a will or wills or that are transferred or will be transferred to a trust under a will or wills.” Even the beneficiary of substantial estate property may hesitate to assume an estate trustee’s role under the amended EATA. Increasingly, affluent testators may plan in order to remove their estate from the reach of the Ontario EATA.